Enter your email to subscribe:

Books and movies were expected with the Enron happenings, but a musical? Andrew Clark of the Guardian Unlimited provides an interesting review of a new musical in Houston that includes an array of songs such as "There's No Business Like Barge Business."

The government appears to now be taking on the judge following a reversal by the Third Circuit Court of Appeals in a non-precedential decision of a dismissal of a mail fraud case premised on honest services. The decision discussed in this entry notes that the failure to disclose a conflict of interest can be the basis of a mail fraud charge.

But having the counts reinstated has not been sufficient for the government. They are now presenting motions arguing that the trial judge should recuse himself. Reported in Examiner.com the judge has not sided with the government on this motion. This case involves the former New Castle County chief executive and his top aide, chief administrative officer, who were accused in a 2004 indictment of racketeering, mail fraud and wire fraud.

David Seide has an article in The Review of Securities and Commodities Regulation titled "Compelled Waivers of the Attorney-Client Privilege." The article discusses the application of the Stein opinions to the privilege waiver provisions found in the Thompson Memo and the SEC's Seaboard Report.

The argument about the conduct of the jury in the corruption prosecution of former HealthSouth CEO Richard Scrushy and former Alabama Governor Don Siegelman continues to play out in the federal courthouse in Montgomery, Alabama. Scrushy and Siegelman are seeking a new trial because two jurors admitted during an evidentiary hearing that they reviewed information on the internet about the case, including downloading a copy of the indictment that was available on the District Court's website but was different from the one sent to the jury during its deliberations. A brief filed by Siegelman argues,

This Court cannot reach any conclusion other than that absent Juror 7 and 40's improper downloading of the wrong Indictments and their use of these Indictments during jury deliberations, this jury would have either acquitted Governor Siegelman or at least hung on the few Counts on which Governor Siegelman was convicted.

* * * * *

The overwhelming evidence is that Jurors 7 and 40 - the only two jurors to grant public interviews following the trial, the only two jurors to repeatedly and deliberately violate this Court's Orders, and the only two jurors to conduct Internet research throughout this trial - were the two jurors that led jury deliberations and orchestrated this verdict. By their actions, Governor Siegelman was deeply prejudiced by the jury's consideration of extrinsic evidence that was not subject to the Court's "full judicial protection of [Governor Siegelman's constitutional] right of confrontation, of cross-examination, and of counsel." Farese v. United States, 428 F.2d 178, 180 (5th Cir. 1970); United States v. Perkins, 748 F.2d 1519, 1533 (11th Cir. 1984). The Government cannot prove that Jurors 7 and 40's misconduct was harmless, and Governor Siegelman is entitled to a new trial.

Needless to say, the government takes quite a different view of what effect, if any, the jurors' conduct had on the outcome of the case. If the District Court denies the motion for a new trial, the issue of juror misconduct will be a featured issue on an appeal to the Eleventh Circuit. A blog on WFSA Channel 12 in Montgomery has an extensive report on the brief (here).

On the HealthSouth front, Scrushy and the company agreed to settle their issues over competing claims by each side. The company obtained an order directing him to return $52 million in bonus payments (plus interest) he received while HealthSouth's earnings and income were inflated through the accounting fraud, while Scrushy won an arbitration award requiring the company to pay $21 million of his attorney's fees in the fraud prosecution in which he was acquitted. The agreement provides that Scrushy will pay HealthSouth $31 million. In addition to the criminal case in Montgomery, Scrushy still faces an SEC securities fraud civil case and shareholder suits. Don't look for any of these fights to end soon. An AP story (here) discusses the settlement between HealthSouth and Scrushy. (ph -- thanks to a blog reader for passing along the jury information)

The SEC is usually quite closed-mouth about its investigations, at least before the filing of a civil enforcement action. When it gets into a fight about enforcing one of its subpoenas, however, the veil is lifted. Unlike grand jury subpoenas, which are presumed valid and can result in a contempt order if the recipient refuses to comply, administrative subpoenas are not self-enforcing and the agency must demonstrate the legitimacy of its investigation and the need for the information. An SEC Litigation Release (here) discusses a subpoena enforcement action filed in the District of Massachusetts seeking to compel David K. Donovan, Sr. and Concetta Donovan to provide documents and for Concetta to testify. The focus of the investigation is their son, David Jr., who worked as a trader at a subsidiary of mutual fund giant Fidelity Investments. The investigation concerns possible tipping by David Jr. to his father and mother about a large pending order at Fidelity, trading that is known as "front running" because the purchaser seeks to get out ahead of the large order that will likely drive up the stock price. According to the Litigation Release (which identifies the father as DKD Sr. and the son as DKD Jr.):

According to the Commission's application and supporting papers, during a period of approximately one month in July and August 2003, DKD Jr. accessed information in FMR Co.'s internal trade database about Covad stock on 44 occasions and thereby learned that FMR Co. was purchasing and intended to continue purchasing substantial amounts of Covad stock for its advisory clients. When DKD Jr. accessed FMR Co.'s internal trade database concerning Covad stock at 7:48 a.m. on August 5, 2003, for example, he would have been able to determine that FMR Co. had pending orders to buy 1,966,400 shares of Covad stock and no pending orders to sell any Covad stock. The Commission alleges that on August 5 and 6, 2003, at least four telephone calls were placed from DKD Jr.'s work number at FMR Co. to his parents' home, and within fifteen minutes of two of those telephone calls, purchases of Covad stock were placed in a brokerage account in Concetta's name. According to the Commission's application and supporting papers, from August 5 through August 7, 2003, a total of 55,000 shares of Covad stock were purchased in Concetta's brokerage account, resulting in profits in the amount of approximately $89,775.

Subpoena enforcement actions are fairly uncommon because the SEC and the recipient usually work out some accommodation without the need to go to court, which slows the investigation considerably. In this case, the Commission is complaining that the Donovans are refusing to provide documents without a valid privilege claim, and that Concetta is claiming physical problems that prevent her from testifying but will not provide any accommodation to allow the testimony to be taken. The law does not recognize a parent-child privilege, as Monica Lewinsky's mother discovered, and it does not sound like Concetta or David Sr. are asserting the Fifth Amendment privilege regarding production of documents or testimony, so the SEC appears to be in a good position to obtain an order to enforce the subpoena. (ph)

The Heritage Foundation's event of yesterday on "The Future of the Attorney-Client Relationship in White-Collar Prosecutions" included opening remarks by Former Attorney General Ed Meese followed by remarks by two former Deputy Attorney Generals - George J. Terwilliger III and Larry Thompson. Obviously, the interest of the audience was in what Larry Thompson would say regarding the memo that bears his name.

Meese starting by noting the importance of the attorney-client privilege. He expressed his hope that DOJ would resolve this issue internally to avoid possible legislation. Terwillinger followed with comments that included his perspective on some of the flaws in the memo. He did not, however, reject a selective waiver approach. Thompson, the final speaker, emphasized the importance of cooperation in investigations. But he also emphasized that the attorney-client privilege is sacrosanct.

It was clear that the way the memo has been used by DOJ in recent years was not the way Larry Thompson had intended for its use when it was written. The waiver of the privilege was for the very rare case. But the most important comment by Thompson was his recognition that this memo needs revision.

And that revision is likely to be coming soon. As reported in the Washington Post it looks like both DOJ (Deputy AG Paul McNulty) is considering internal modification of the memo and Senator Arlen Specter is considering legislative change to finally end the practice of having corporations waive their attorney-client privilege.

Legislation is really the best way to proceed here. DOJ has been told time and again to stop asking or implying a benefit or detriment premised on the waiver of the attorney-client privilege. The only thing that has happened in response to the outcry, is a minor memo that merely looks for consistency internally in each office. With 94 offices it means basically no oversight. The problem with now letting DOJ try to remedy this with an internal policy is that it will not provide the permanent consistency necessary to protect this important common law privilege. More importantly, DOJ guidelines are not enforceable at law. So if they fail to abide by any guideline that they write, it will only be as good as DOJ wants it to be. Additionally, every new Attorney General might revise the possible memo or just ignore it. Thus, what is happening now in deferred prosecution agreements could happen again, even if a DOJ guideline was instituted.

For a department that strives for consistency at sentencing, it seems odd for them to be advocating for mere adoption of internal guidelines that would not provide consistency when it comes to the application of a basic common law principle. Senator Spector is right to move ahead on this one.

The Committee on Capital Markets Regulation, a blue-ribbon panel encouraged by Secretary of the Treasury Paulson, delivered its Interim Report (here) on how to improve the competitiveness of the U.S. financial system and its regulation. Most of the report is devoted to the civil side of the ledger, including the expected push against Sarbanes-Oxley Act Section 404 that mandates extensive internal control mechanisms in public corporations that are arguably burdensome and too expensive for the benefit gained. In the criminal law area, the main proposals are to limit the criminal prosecution of corporations and to eliminate from the Thompson Memo any consideration of whether a corporation pays the attorney's fees for its directors and employees in an investigation.

The proposal to limit the prosecution of corporations to situations that are "exceptional" is bare-bones, saying little more than such prosecutions should not be filed except as a last resort but with no real explanation of when that circumstance will exist except if wrongdoing is "pervasive." Moreover, the recommendation contains incorrect factual assertions that may undermine the strength of its message. The Interim Report states:

Except in truly exceptional cases, there is no independent benefit to be gained from indicting what is in fact an artificial entity. As the demise of Arthur Andersen attests, criminal indictments of entire companies—especially those in the financial services industry where reputation is so crucial—effectively results in the liquidation of the entire firm; with this comes the attendant disruption of the lives of many employees and stakeholders who are totally innocent of wrongdoing.

Extant guidelines of the U.S. Department of Justice (the “Thompson Memorandum”) on whether to prosecute a firm fail to take account of the damage to innocent employees and shareholders and, in some cases, to the entire economy. The Committee recommends that the Justice Department revise its prosecutorial guidelines so that firms are only prosecuted in exceptional circumstances of pervasive culpability throughout all offices and ranks.

The assertion that a criminal indictment "effectively results in the liquidation of the entire firm" is simply incorrect. The demise of Arthur Andersen is certainly striking, and appears to be the guiding, and indeed only, example of a corporate criminal prosecution relied upon for this conclusion. The Report even muddles that point when it asserts that "[t]he almost instantaneous demise of Arthur Andersen at the indictment stage underscored how in the financial world a defendant can be financially ruined long before conviction." While the indictment of Andersen certainly harmed its business, it was the conviction, and resulting loss of its accounting licenses, that resulted in the firm going out of business.

To assert that every corporation indicted for a crime immediately goes out of business ignores the many prosecutions (and convictions) of companies in the environmental and health care fields, among others, that do not result in the company ceasing operations. Certainly for a privately-held company the consequence of an indictment is usually its demise, but that is often as much a function of its controlling shareholders also being charged with a crime. Any number of companies have been charged with violating the Foreign Corrupt Practices Act and remain in business, paying the fine and agreeing to make the necessary changes to prevent future wrongdoing.

While there are certainly good arguments that vicarious liability for corporations may be economically unsound and not a fair reflection of the principles of due process, it is not the case that an indictment results in the immediate destruction of a company. Heating up the rhetoric to make it sound like many corporations are on the precipice of disaster at the prosecutor's whim is not a good way to advance the debate about corporate criminal liability. (ph)

The U.S. Attorney's Office for the Southern District of California and the SEC filed criminal and civil insider trading charges against Robert Gallivan for trading in the shares of five California community banks before they were acquired. According to the SEC Litigation Release (here):

Prior to the public announcement of proposed mergers involving Valencia Bank & Trust (announced August 6, 2002), Monterey Bay Bank (announced April 8, 2003), Sun Country Bank (announced April 30, 2003), Mid Valley Bank (announced September 16, 2003) and Harbor National Bank (announced December 1, 2003), Gallivan obtained nonpublic information that each of the five banks was engaged in negotiations to be acquired.

To settle the SEC case, Gallivan paid $106,711, prejudgement interest, and a double penalty of of $213,422. Gallivan also entered a guilty plea to four counts of securities fraud. (ph)

With Democrats taking control of the House and Senate in the recent elections, the change in power means more than just a shift in jobs on Capitol Hill. It will also be an opportunity for Democrats to investigate the real and perceived problems of the Bush Administration, which means everyone called before a committee to testify is going to need a lawyer. Washington, D.C. powerhouse law firm Covington & Burling issued a memorandum (here) on November 16 alerting its clients and others to possible avenues of Congressional inquiry that may require, naturally, expert representation by experienced counsel.

The memo notes the following three areas as likely to draw investigative interest:

Companies Connected to Alleged Bush Administration Failures or Abuses, and Companies and Industries Perceived to Have Close Ties to the Administration

Corporate Accountability Redux

The memo is particularly blunt about what the second area will entail: "Companies that played a role in what are perceived as Bush Administration failures or abuses also likely will be targets for congressional investigators. Examples include companies involved in the Iraq redevelopment effort, telecommunication and Internet companies that responded to warrantless wiretap orders, and companies that provided services to Katrina victims. These lines of inquiry offer the 'triple play' of embarrassing the Administration, uncovering potential corporate abuses, and highlighting the prior Congress’s abdication of its oversight responsibilities." (emphasis added) There's nothing like a "triple play" to ensure that white collar practice groups remain busy. (ph)

The cases come up all the time: the trusted financial person turns out to be a crook stealing from the company. Today's edition comes from the Eastern District of Virginia, where the U.S. Attorney's Office announced (here) the guilty plea of Carl Ragland, the former controller of C&F Mortgage Corp., a subsidiary of Citizens & Farmers Bank. The take in this one is particularly large, with an embezzlement of $2.2 million since 2003, including wire transfers of over $1.2 million in 2005 alone. According to the press release, Ragland used his new-found wealth "for his personal enrichment, [including] the purchase [of] real estate, automobiles, vacations and other personal expenses." The question is always the same: was anyone checking on the controller and asking where the money was going? (ph)

One usually thinks of disclosure rules for public officials as a means to get information out in the open so all can see who is providing gifts, and how much they are worth. The Texas Ethics Commission, however, is taking a bit more restrictive view of what has to be disclosed about a gift. A staff advisory opinion approved by the Commission in a 5-3 vote, which is discussed in an AP article (here), only requires the official to disclose what was received, but not the gift's value. Under this approach, a disclosure of receiving a "check" is sufficient without listing the amount. The opinion relates to a case in which a member of the State Employees Retirement Board who had served as treasurer for former Representative Tom DeLay's campaign only disclosed the receipt of a "check" from a Republican donor, which was to help him offset legal fees related to an investigation of the DeLay campaign. The check was for $50,000, a very nice gift. If the Texas Ethics Commission's opinion stands up, then future disclosures might just say "cash," "boat" or "car" with nothing more. (ph)

Embezzling from one employer is bad enough, but some people just can't seem to stop themselves even when they get a new job. Eric Hurt entered a guilty plea in August 2006 to fraud charges related to embezzling over $110,000 while he worked at the Hoboken Housing Agency from 2001 to 2004 by writing 34 checks to himself (see earlier post here). While awaiting sentencing on that charge, the government determined that Hurt also embezzled anywhere from $120,000 to $200,000 for his next employer, the Brooklyn Day Montessori School, where he was business manager from 2005 to 2006. According to a press release (here) issued by the U.S. Attorney's Office for the District of New Jersey, "he issued salary and bonus payments to himself from the school well in excess of his authorized salary; made unauthorized wire transfers of money from a school bank account to himself; and used the school’s ATM card to make unauthorized cash withdrawals from a school bank account for his personal benefit." I wonder what kind of reference he got from the Hoboken Housing Authority before he took the school job. Needless to say, a second embezzlement won't help when Hurt is finally sentenced. (ph)

Yet another corruption prosecution hits Philadelphia, this time Mayor James Street's older brother, Milton, who has been charged with fraud and tax evasion. Over the past year, the city's former Treasurer and a member of the City Council were convicted on corruption-related charges. The indictment (here) alleges that Milton Street, described as a "food vendor," used his purported access to his brother to obtain consulting arrangements for thousands of dollars from companies with contracts at the Philadelphia airport. According to the indictment, Milton Street "began hiring himself out as a highly-paid consultant to area businesses who believed that defendant STREET could help them obtain business with the City of Philadelphia." One of the alleged contracts involved $30,000-per-month payments.

An AP story (here) quotes Milton Street stating, "I think, honestly, that I stayed in bounds (of the law) . . . Now, I have to tell you, I am the worst record-keeper in the history of the modern man." Sounds like the beginnings of an "honest-but-disorganized businessman" defense. Mayor Street is not implicated in any of the alleged violations. With Donovan McNabb out for quite a while recovering from knee surgery and the Sixers buoyed only by playing in the incredibly weak Atlantic Division, these are tough times in Philly. (ph)

Greg Farrell, USA Today's article - White Collar Crime Prosecutors in a Slump takes some baseball shots at prosecutors in the US Attorneys Office in Manhattan. They declined to respond, as they should, and for that they deserve credit.

But calling recent happenings in their office a sign of a "losing streak" does deserve some response. For one - prosecutors never lose. As true "ministers of justice" their job is not to convict, but merely to present the evidence fairly to the jury for them to properly evaluate. And when the evidence is not there, having them dismiss or not pursue a case is the "right" thing to do.

- dropping the Quattrone case - Outstanding is the way it should be described. Perhaps they erred in bringing this case initially, but they certainly cannot be criticized for not wasting taxpayer dollars on not proceeding with yet another trial that focuses on an email exchange.

- dropping cases against specialists - clearly the right thing to do when the evidence warrants that they should not proceed.

Prosecutors should not be faulted when they act as "ministers of justice." This umpire is calling a foul here.

The ABA Net has a piece praising its efforts in enforcing the attorney-client privilege despite a DOJ policy in the corporate sphere - a provision within the Thompson Memo. See also what Professor Alan Childress of the Legal Profession Blog says in this interesting post on the present status of the Thompson Memo. But the key will be to hear what Larry Thompson will say when he speaks at the Heritage Foundation this coming Thursday (see here). This blog will be covering that event.

What are the possibilities here -

Thompson could hold firm on his Memo and advocate for continuation of waiving the attorney-client privilege.

or -

Larry Thompson, a man of the highest of professional standards, could easily say that the provision in this memo was to encourage corporate cooperation, but that it was never intended to be used the way the DOJ presently uses it. It is important to remember here that the waivers coming from the Memo come predominantly in deferred prosecution agreements. Many of these agreements are post-the-Thompson stay at DOJ.

Even without Larry Thompson taking a stance on his memo, it will be nice to hear his reflection on what was intended and whether some things that happened here were unintended consequences.

The trial of plaintiff class action firm Milberg Weiss on conspiracy, RICO, and fraud charges is set to begin in January 2008. At a scheduling conference with U.S. District Judge John Walter, prosecutors said that the government may add charges against the firm, which could involve fraudulent billings by experts. If new charges are added, that could postpone the trial even further, making it more difficult for Milberg Weiss to remain in business with the threat of a possible criminal conviction. It is not clear at this point whether the government has any cooperating witnesses providing information about questionable payments to experts. The investigation has been dragging on for over six years now, and unless the payments occurred within the past five years there may be statute of limitations problems, except if it is part of a larger RICO or conspiracy charge. A Los Angeles Times article (here) discusses the status of the case. (ph)

A press release of the Middle District of Alabama reports on the sentences received by the cooperators in the Siegelman/Scrushy trial. It states that:

"Businessman Clayton Lamar “Lanny” Young received 24 months imprisonment and a fine of $25,000 for two counts of conspiracy and one count of filing a false tax return for his role in a wide-ranging scheme to corrupt state government through Siegelman. Nicholas Bailey, who was Siegelman’s assistant and a former head of a state development office, received 18 months imprisonment for his role in the scheme involving one count of conspiracy and one count of filing a false tax return."

The court is presently dealing with post-trial motions being made by Siegelman and Scrushy. (see here)

According to a press release of the United States Attorney for the District of Kansas, "[t]wo former sales representatives for a food brokerage in Kansas City, Kan., were sentenced Monday for their parts in a conspiracy to defraud some of the nation’s largest manufacturers including Tropicana and Con Agra Frozen Foods." They had been accused of "submit[ting] false paperwork to food manufacturers seeking payment for lost or damaged merchandise" and also "issu[ing] store credits to store managers for items they removed and then submit[ting] a request to the food manufacturers for checks to cover the cost of the items."

This brings to three the number of individuals being sentenced in this scam, with all receiving five years probation. Sentencing is set for two other individuals with related charges.

It used to be that counterfeit "Beanie Babies" were the subject of government prosecutions, but the latest seems to be ""Yu-Gi-Oh" Trading Cards. Fraud Update here has a press release from the Central District of California that reports on a plea to trafficking counterfeit. The item attempted to be sold was "counterfeit 'Yu-Gi-Oh' playing cards that would have been worth more than $1 million if they were legitimate." The defendant had a substantial problem in his sale in that the buyers were undercover federal officers. Thus, it is not surprising to see a plea entered here.